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Here Is Where Kinder Morgan's Capital Would Do the Most Good

NEW YORK (TheStreet) -- The question few have asked about Kinder Morgan’s(KMI - Get Report)roll-up of its master limited partnerships into a single company is what happens next.

What happens next is a buying spree.

It may be difficult to identify potential targets. There are more than 120 MLPs in the pipeline arena with a combined market cap of $875 billion -- the buffet table is too big even for a man with Rich Kinder’s financial appetite. Still, we can speculate.

As I wrote yesterday, a key to the future may be Kinder Morgan’s own "asset map," which shows a big hole in the Bakken Field of North Dakota, and limited participation in the eastern Marcellus gas field. The Bakken is where I think KMI is going first, because the state remains short on oil and gas infrastructure, as Gov. Jack Dalrymple noted at his second "Pipeline Summit" in June.

Based on that there are two obvious targets: Crestwood Midstream Partners(CMLP - Get Report) and MDU Resources(MDU).

I wrote about Crestwood just last month. CMLP made two acquisitions during 2013, becoming a major Bakken midstream player. The news peg was a brine leak -- new investment would shore up operations quickly. Crestwood has a market cap of about $4 billion, it would be accretive to earnings, and its debt levels of 25% aren’t bad, either. A Crestwood deal would immediately make KMI a major player in the business of moving oil, gas and liquids in the Bakken, which is what Kinder has acknowledged he wants to be.

MDU Resources has been selling assets recently and is an operating electricity and natural gas utility in eight states. The whole company has a market cap of $5.86 billion, is profitable and has a debt-to-equity ratio of less than 25%.

Of greatest interest to KMI might be its WTI Pipeline unit, whose network collects gas in North Dakota, Wyoming and Montana, with interconnects into Canada. It held an open season for a new gas pipeline that would run across the state early this year, but since it ended in May, the company has not made a public comment on it. KMI might just buy WTI and push that pipeline through without firm commitments from suppliers.

There are other large midstream players KMI might buy that have assets including CEOs in their 40s. KMI's COO is Steven Kean, only 52, but young talent is always at a premium in the oilpatch. Summit Midstream(SMLP) has assets in both Colorado and in the Marcellus, and CEO Steven Newby is well-named at only 40. With a market cap of just a bit less than $3 billion it would be an easy deal to make. DCP Midstream Partners(DPM) has done a lot of work with natural gas liquids, has eastern assets and CEO Wouter van Kempen is 44. Its market cap is less than $6 billion.

Finally, Kinder is very interested in new supplies of carbon dioxide, which can be injected into wells in liquid form to coax more production out of tight formations. NRG Energy(NRG), which I wrote about last week, is planning a $1 billion retrofit on a coal-fired power plant near Houston aimed at producing carbon dioxide for fracking. It doesn’t really fit NRG's green strategy, but could make a nice asset in KMI’s new, growing portfolio.

At the time of publication the author owned no shares in companies mentioned in this article.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Now let's look at TheStreet Ratings' take on some of these stocks.

TheStreet Ratings team rates KINDER MORGAN INC as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

"We rate KINDER MORGAN INC (KMI) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its robust revenue growth, good cash flow from operations, expanding profit margins, increase in net income and notable return on equity. We feel these strengths outweigh the fact that the company has had lackluster performance in the stock itself."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

The revenue growth came in higher than the industry average of 2.1%. Since the same quarter one year prior, revenues rose by 16.4%. This growth in revenue does not appear to have trickled down to the company's bottom line, displaying stagnant earnings per share.

Net operating cash flow has increased to $1,085.00 million or 14.21% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -7.19%.

38.48% is the gross profit margin for KINDER MORGAN INC which we consider to be strong. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of 7.21% trails the industry average.

The net income growth from the same quarter one year ago has exceeded that of the S&P 500, but is less than that of the Oil, Gas & Consumable Fuels industry average. The net income increased by 2.5% when compared to the same quarter one year prior, going from $277.00 million to $284.00 million.

KINDER MORGAN INC reported flat earnings per share in the most recent quarter. The company has suffered a declining pattern of earnings per share over the past year. However, we anticipate this trend reversing over the coming year. During the past fiscal year, KINDER MORGAN INC reported lower earnings of $1.15 versus $1.22 in the prior year. This year, the market expects an improvement in earnings ($1.23 versus $1.15).

TheStreet Ratings team rates MDU RESOURCES GROUP INC as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate MDU RESOURCES GROUP INC (MDU) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its impressive record of earnings per share growth, compelling growth in net income and revenue growth. We feel these strengths outweigh the fact that the company has had lackluster performance in the stock itself."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

MDU RESOURCES GROUP INC has improved earnings per share by 16.7% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, MDU RESOURCES GROUP INC turned its bottom line around by earning $1.46 versus -$0.08 in the prior year. This year, the market expects an improvement in earnings ($1.60 versus $1.46).

The net income growth from the same quarter one year ago has exceeded that of the S&P 500 and the Multi-Utilities industry average. The net income increased by 16.3% when compared to the same quarter one year prior, going from $46.51 million to $54.10 million.

Despite its growing revenue, the company underperformed as compared with the industry average of 7.2%. Since the same quarter one year prior, revenues slightly increased by 3.1%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.

The gross profit margin for MDU RESOURCES GROUP INC is rather low; currently it is at 18.46%. Regardless of MDU's low profit margin, it has managed to increase from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 4.94% trails the industry average.

In its most recent trading session, MDU has closed at a price level that was not very different from its closing price of one year earlier. This is probably due to its weak earnings growth as well as other mixed factors. Looking ahead, the stock's rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that the other strengths this company displays justify these higher price levels.

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